Paulson "Will Do Whatever it Takes"

Indeed, Paulson will do whatever it takes to bail out his friends on Wall Street. The price for this will be paid by all holders of the US dollar.


Paulson Says He'll `Do What It Takes' to Calm Markets
By Brendan Murray

March 16 (Bloomberg) -- Treasury Secretary Henry Paulson said the U.S. will ``do what it takes'' to maintain confidence in financial markets and defended the bailout of Bear Stearns Cos. as ``the right decision.''

``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said in an interview in Washington on the ``Fox News Sunday'' television program. ``I think we made the right decision.''

Paulson, 61, spoke two days after the Federal Reserve was forced to give an emergency loan to Bear Stearns, the fifth- largest U.S. securities firm. The move failed to avert a crisis of confidence among Bear Stearns customers and shareholders, who drove the stock down a record 47 percent.

In separate appearances today, the former chairman of Goldman Sachs Group Inc. called the rescue ``the right decision'' and expressed ``great confidence'' in Fed Chairman Ben S. Bernanke. Paulson said that in the case of Bear Stearns, the risk to financial stability outweighed his concern about so- called moral hazard, in which investors come to expect government rescues.

``I really understand the moral hazard argument,'' he said. ``On the one hand, you've got moral hazard and on the other you've got what's right for the markets, what's right for the stability of the financial system and the U.S. economy.'' (this Republican administration has the moral sensitbilities of a billy goat. - Jesse)

Bear Stearns Talks

Paulson said ``conversations are going on over the weekend'' about Bear Stearns. ``I'm very involved in those conversations.'' He declined to be specific about the future of the 85-year-old firm, the second-biggest underwriter of U.S. mortgage bonds, or say whether any additional government steps are planned.

``The government is prepared to do what it takes to maintain the stability of our financial system,'' Paulson said. ``Our focus, our No. 1 priority, is the stability of our financial system.''

The Treasury chief refused to say what a growing number of economists have concluded -- that the economy has entered a recession.

``Economists are going to be debating that for months and months,'' he said. ``It's much less important what you call it than what you're doing about it.''

The Standard & Poor's 500 Index is down 12.3 percent this year, while the dollar is down 5 percent against a basket of currencies of major U.S. trading partners. Home foreclosures in January and February year were up 58 percent from the first two months of 2007.

Faith in Institutions

``I've got great confidence in our financial markets and our financial institutions,'' Paulson said. ``Our markets are resilient, are flexible. Our institutions -- our banks and investment banks -- are strong.'' (Sounds like the CEO of Bear Stearns the day before his company rolled over - Jesse)

Paulson repeated his support for a ``strong dollar,'' and said the long-term strength of the U.S. economy would be reflected in the country's currency. (Anyone who believes this anymore is a simpleton - Jesse)

President George W. Bush is scheduled to meet tomorrow with his Working Group on Financial Markets. Paulson chairs the group, which includes Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

The Bush administration has resisted the use of government funds or guarantees to stem the surge in foreclosures. Paulson has brokered a series of voluntary accords among lenders to freeze interest rates on subprime loans and negotiated a one- month moratorium on foreclosures.

`Fragile' Markets

A credit crisis that began in August has left markets ``more fragile than we would like right now,'' Paulson said in a separate interview on ABC News's ``This Week'' program. ``My concern is to minimize the impact on the broader economy.''

Paulson said the administration doesn't support measures in Congress to help struggling homeowners.

House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd offered a plan last week to let the Federal Housing Administration insure refinanced mortgages after lenders reduce principal to help struggling borrowers.

The two lawmakers are leading congressional efforts to tackle the surge in foreclosures, which reached record levels in the fourth quarter of 2007. Their plan goes beyond the Bush administration's approach that relies on voluntary agreements between lenders and loan servicers to modify mortgages for borrowers who can't make their monthly payments.

``I'm looking very carefully at any proposal, but all the ones I've seen call for much more government intervention, raise more problems, do more harm than do good,'' Paulson said in the ABC interview.

Greater Oversight

Paulson last week proposed that U.S. regulators heighten their scrutiny of lenders, mortgage brokers and debt-rating firms to prevent a reoccurrence of the credit crisis roiling capital markets. Writedowns from subprime securities will probably rise to $285 billion, Standard & Poor's said in a report March 13.

``This has become the Bush recession,'' Senator Charles Schumer, a New York Democrat, said on the Fox News program. ``The president's hands-off attitude is reminiscent of Herbert Hoover,'' who led the country from 1929 to 1933.

Bush, under fire from Democrats who say he's doing too little to help homeowners facing foreclosure, yesterday said he won't be stampeded into ``bad policy decisions'' that might harm the economy.

``The market now is in the process of correcting itself, and delaying that correction would only prolong the problem,'' he said in his weekly radio address. ``I believe the government can take sensible, focused action to help responsible homeowners weather this rough patch.''

To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net
Last Updated: March 16, 2008 11:44 EDT

2007-2009 Bear Market Update

Bear Stearns: The Smoking Gun(s)

There are at least two ways in which a failure at Bear Stear might have precipitated a decimation of the Wall Street financial community: counterparty risk and the triggering of a chain reaction of failures.

First, as of Nov 30, 2007 Bear Stearns was counterparty to 13 TRILLION in derviatives contracts, as shown in their most recent public 10K Filing with the SEC. (hat tip to jerrbear from PrudentBear for tracking down the reference page. Great catch!).

As of November 30, 2007 and 2006, the Company had notional/contract amounts of approximately $13.40 trillion and $8.74 trillion, respectively, of derivative financial instruments, of which $1.85 trillion and $1.25 trillion, respectively, were listed futures and option contracts...

The Company's derivatives had a notional weighted average maturity of approximately 4.2 years at November 30, 2007 and 4.1 years at November 30, 2006. The maturities of notional/contract amounts outstanding for derivative financial instruments as of November 30, 2007 were as follows:

The second method would be a failure at Bear Stearns that triggers a cascade of failures in the Credit Default Swaps (CDS) market. This is not counterparty risk. The risk here is of CDS wagers on the failure of Bear Stearns itself. This market consists of derivative 'wagers' on the credit failure of specific companies. This market has become a leveraged nightmare, being so large that the failure of any single significant company such as Bear Stearns could precipate a chain reaction of defaults. As you may recall we pointed out some time ago that after subprime the next area to watch closely as a potential tipping point would be the CDS market.














Notice that Bear Stearns is not EVEN LISTED as holding derivatives in any of the tables we looked at in the OCC Report. Is this because of their 'non-bank' status? We wonder how many other US corporations are quietly loaded up with derivatives risks as well, either as a large counterparty, or the target of a pyramid of wagers on failure risk many hundreds of times their actual net worth. What a monster Wall Street has created for the world.

Credit Default Swaps: Is Your Fund at Risk?

Fed Bails Out Bear Stearns, Uses J.P. Morgan as 'Conduit'

The shock of the morning was the 'news' that the Federal Reserve Bank of NY was stepping in to accept the collateral of Bear Stearns in order to prevent the company from insolvency. The shock was that just yesterday the CEO of Bear Alan Schwartz reassured investors that the company had no problems, that their "liquidity was strong." Today we hear that the situation deteriorated 'overnight.'

You will no doubt hear spin and interpretation about this bailout. Here are a few key points that we can state with some level of confidence.

• The Fed is acting as 'lender of last resort' and saving Bear Stearns from insolvency.


• J.P. Morgan is acting as agent or a conduit for the Fed. They are not accepting the risk.


• Bear Stearns could not wait until March 27 when they would have had direct access to the new TSLF. The situation at Bear is so bad that no other bank on the Street would consider providing funding.


• The Fed stepped up in what can only be described as an extraordinary action not seen since the bank failures of the 1960's and 1930's.


• The Fed decided they could not allow Bear Stearns to go through even a managed, orderly failure because it would have set off a major chain reaction of counter-party risk failures that would have decimated Wall Street.


• The deceit and fraud will continue until stopped by an external regulatory force not controlled by special interests.
  
  
  Bear Stearns Bailed Out by Fed, J.P.Morgan
  Friday March 14, 11:34 am ET
  By Stephen Bernard, AP Business Writer
  Teetering Bear Stearns Gets Bailout From Federal Reserve, J.P.Morgan Chase
  
  NEW YORK (AP) -- Bear Stearns Cos., one of Wall Street's venerable investment banks, received a bailout Friday by the federal government and JPMorgan Chase & Co. in a surprise, last-ditch effort to save the 86-year old institution.
  
  The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had "significantly deteriorated" within a 24-hour period. Central bankers backed an arrangement to bolster the company, and stood ready to provide extra resources to combat a credit crisis that now threatens one of America's biggest financial institutions.
  
  Bear Stearns, the nation's fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities -- a strategy that might be its undoing amid the worst housing slump in a quarter century. The bank has racked up $2.75 billion in write-downs since last year, and faced a possible collapse without some kind of lifeline.
  
  Bear Stearns lost half of its value within 30 minutes of the market open, before clawing back a bit to be down 41 percent, or $23.51, at $33.49 by midday. The news rattled investors, pushing the Dow Jones industrial average down about 150 points.
  
  JPMorgan Chase, the nation's third-largest bank, agreed to pump more money into Bear Stearns to keep it in business, but did not divulge how much it was spending. Top executives from both companies were in talks, and were even considering the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record.
  
  Bear Stearns said in a statement that it is working with JPMorgan Chase to find permanent strategic alternatives to alleviate their cash problems.
  
  JPMorgan Chase -- which has been hurt far less by the mortgage morass than other investment banks -- is providing secured funding to Bear Stearns for 28 days, backstopped by the Federal Reserve Bank of New York. Bear Stearns and the Fed approached JPMorgan Chase about the financing and a potential deal, according to the person familiar with the talks.
  
  Rumors have persisted throughout the week that Bear Stearns was facing major cash flow problems, but the investment bank's chief executive initially denied those rumors.
  
  "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity," the bank's president and chief executive, Alan Schwartz, said in a statement Friday. "Amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated."
  
  In a memo sent to employees, Schwartz said the temporary financing would allow the company to "get back to business as usual."
  
  The company has struggled since the middle of last year because of the fallout in the mortgage and credit markets. Last summer, two hedge funds worth billions of dollars managed by Bear Stearns collapsed because of bad bets on securities backed by subprime mortgages -- loans given to customers with poor credit history.
  
  JPMorgan Chase said the financing would not expose its company to any material risk, though its shares dropped 1.4 percent, or 53 cents to $37.58.
  
  AP Business Writers Madlen Read and Joe Bel Bruno in New York and Martin Crutsinger in Washington contributed to this report.
  
  
  JPMorgan Chase and Federal Reserve Bank of New York To Provide Financing To Bear Stearns
  
  NEW YORK -- (Business Wire) --
  
  Today, JPMorgan Chase & Co. (NYSE: JPM) announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase.
  
  Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.
  
  JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.6 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients under its JPMorgan and Chase brands. Information about the
  firm is available at http://www.jpmorganchase.com/. Contacts: JPMorgan Chase & Co.
  Investors: Julia Bates, 212-270-7318 or Media: Kristin Lemkau, 212-270-7454